Germany Indicates that IMF Should Aid Greece

Matthew Saltmarsh and Nelson D. Schwartz|The New York Times

Friday, 19 Mar 2010 | 6:22 AM ETThe New York Times

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After weeks of backing a European rescue for the financially troubled Greece, Germany shifted course on Thursday, signaling that help should come from the International Monetary Fund rather than Greece’s neighbors.

Tom Pfeiffer | Getty Images

View over the caldera of Santorini in Greece.

Turning to the IMF would represent a new and potentially humiliating twist in Greece’s financial drama, which was set off by doubts about Athens’s ability to borrow 53 billion euros this year to finance a yawning budget deficit and refinance waves of debt coming due.

Worries that investors would shun Greek bonds and force a default shook markets worldwide last month but eased recently after Germany and other members of the European Union signaled they would come to Greece’s aid if necessary. The Greek government, in turn, unveiled a long-awaited package of budget cuts.

But prospects for both European aid and domestic spending cuts seemed to fade Thursday with Berlin’s about-face, as well as a warning from Greece’s prime minister that the promised budget cuts might not be enacted unless the country could borrow at lower interest rates.

“We will make it, provided that our country can borrow on reasonable terms,” Prime Minister George A. Papandreou said in a cabinet meeting that was broadcast in Greece. “Based on those conditions, our country is not seeking and will not seek financial aid, either from our European partners or from the IMF, which would be our last resort.”

Despite Mr. Papandreou’s brave talk, it is likely that some form of aid will be needed to help Greece raise the 53 billion euros, which includes 20 billion euros that is needed in April and May alone. And for Greece, as well as the European Union, the maneuvers Thursday amount to fiscal brinksmanship.

Greece would prefer that any financial help come from Europe, to avoid the embarrassment of turning to the IMF But with voters in Germany and elsewhere strongly opposed to a bailout for what they see as a profligate government, European leaders want to see proof the Greek government is serious about cutting spending after years of living beyond its means.

Citing legal hurdles, a government official in Berlin said on Thursday that Germany believed that any external financial support to Athens would best be provided by the IMF.

“In the case that the Greeks get into really serious problems, we would support an IMF solution,” said the official, who was not authorized to speak publicly on the matter.

Beside unsettling the markets, Greece’s troubles have undermined the euro, the common currency it and 15 and other European nations share.

Amid the uncertainty, the euro slipped against the dollar and was quoted at $1.3621 in afternoon trading in New York on Thursday, down from $1.3741 early in the session. European stocks also wilted, with the Athens Stock Exchange General Index ending 3.4 percent lower.

Since the euro’s inception in 1999, no member has sought support from the IMF, which typically comes to the rescue of emerging-market economies rather than developed countries. The earlier offer of support for Greece did calm markets and take the spotlight off Greece, but European leaders have been vague about how any aid package would actually be structured.

The Greek government, however, has been pushing for more clarity on what its neighbors will do in the hope of bringing down its borrowing costs, which have risen as Greece’s debt troubles have become more acute.

The yield on Greece’s benchmark 10-year bonds rose Thursday to 6.265 percent — a spread, or differential, of 3.14 percentage points over comparable German bonds, the European benchmark for safety.

Germany says it believes that Athens can live with that premium, but the Greek government thinks it should not have to pay that much to borrow now that it has agreed to measures meant to cut its budget deficit to 8.7 percent of gross domestic product. Greece’s budget deficit hit 12.7 percent of GDP last year, making it the worst gap in Europe.

If Athens relies on financing from the markets at high interest rates, “that undermines the actual measures that you are taking,” Mr. Papandreou said. “That money then goes to the interest of those who are loaning to you rather than the implementation of a program.”

The prime minister said that he still hoped for a positive response from Greece’s neighbors at a meeting of European Union leaders next week in Brussels. “We have kept all options open,” he said.

Germany’s new stance could worsen divisions in Europe, since President Nicolas Sarkozy of France and Jean-Claude Trichet, the president of the European Central Bank, both favor a European rescue effort rather than an IMF-orchestrated one.

Already, the varying announcements from Berlin have left some politicians in Europe cold. “I find what has happened, or rather what has not happened over the past few days and weeks, incomprehensible,” said Guy Verhofstadt, the former Belgian prime minister and the current president of the Liberal Democratic bloc in the European Parliament. “It is incomprehensible because it is precisely a European response that is the quickest and least costly solution.”

In Washington, Caroline Atkinson, the IMF’s director of external relations, said on Thursday that the fund had not yet been approached by Athens.

“We expect the euro-zone countries to want to and to plan to resolve this question by themselves,” Ms. Atkinson said. She added that the IMF was ready to respond to a request from Greece for a loan.